1. Considering the current tax code, financing decisions won\'t affect the size
ID: 2663076 • Letter: 1
Question
1. Considering the current tax code, financing decisions won't affect the size of the cash flow available to all providers of capital; they only affect who recives the flows. Is this true or false statement. Explain why?
2. Due to the varying market imperfections, financial decisions related to the liabilities side of the balance sheet are less easily reversed than investment dicsisions related to the asset side of the balance sheet. Is this true or false statement. Explain why? 3. While making a decision about dividends, management should be primarily concerned about what signal it conveys to the market. Is this true or false statement. Explain why?
1. Considering the current tax code, financing decisions won't affect the size of the cash flow available to all providers of capital; they only affect who recives the flows. Is this true or false statement. Explain why? 2. Due to the varying market imperfections, financial decisions related to the liabilities side of the balance sheet are less easily reversed than investment dicsisions related to the asset side of the balance sheet. Is this true or false statement. Explain why? 3. While making a decision about dividends, management should be primarily concerned about what signal it conveys to the market. Is this true or false statement. Explain why?
Explanation / Answer
I1) Yes, the financing decisions would not affect the size of the cash flows avilable to all providers of capital ; they would affect on only who receives the cash flows. For example dividend payment is the one of the financing decision. It would affect on who receives the cash flows (dividends). Some of the Financing activities are; Issue of Common Equity, Issue of Long-term debt and Payment of Long-term debt etc. Hence, this is the True Statement.
(2) Yes, this is true. Financial decisions related to the liabilities side of the balance sheet are less earily reversed then investment decisions related to asset side of the balance sheet causes due to changing market imperfections.
(3) Yes, this statement is true. While making a decision about dividends, the management should be primarily concerned about what signal it conveys to the market. Once, the management decided to distribute the dividends among the shareholders, it would be affect on overall market. Hence, the management should be primarily concerned about total market.
Hence, this statement is true. We consider dividend policy as a complex decision making which involves the firm and all the parties that the firm collaborates with. We recognize that dividend payout decision is a corporate choice which affects the firm in two ways. The first involves the dividend choice and how this decision affects the third parities of the firm. The second refers to the reaction of all the third parities to that dividend decision and how this reaction affects the firm.
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